Accounting Standard - 21

Consolidated Financial Statements

CA Mehul Shah
B. Com, F.C.A., DISA (ICA).

# : 2510 0861; 2510 9990

Email : mehulshah@shah3ca.com
Accounting Standard – Broadly….

ICAI

The Income-tax Act 1961

Ministry of Corporate Affairs

  Listed/Proposed to be listed Cos
 Banks, FIs, Insurance Cos
Level - I  Enterprises with > 50 crores Turnover in
preceding year

 > 10 crores borrowings at any time during the

year
 Holding & subsidiary Cos of above.

Level - II  Enterprises with > 40 Lacs but < 50 crores

Turnover.
 > 1 crore but < 10 crores borrowings
 Holding & subsidiary cos of above.

Level - III  Other than Level - I & Level - II cases

w.e.f 17-Sep-2003
The Companies (Accounting Standards)
Rules, 2006.

December 7, 2006

Exemptions withdrawn?

3 (1) The Central Government hereby prescribes

Accounting Standards 1 to 7 and 9 to 29 as
recommended by the Institute of Chartered
Accountants of India, which are specified in the
Annexure to these rules.
The Companies (Accounting Standards)
Rules, 2006.

“The Company is a Small and Medium Sized

Company (SMC) as defined in the General
Instructions in respect of Accounting
Standards notified under the Companies Act
1956. Accordingly, the Company has
complied with the Accounting Standards as
applicable to a Small and Medium Sized
Company.”
 Background

Not mandatory under the Companies Act, 1956 –

Statement under section 212

Financial performance and net worth of the group as a
whole were not known to stakeholders

Not in line with international reporting standards

SEBI made consolidation mandatory for listed
companies

AS 21 provides guidelines for consolidation
Applicable in

– Preparation and presentation of CFS for a group

of enterprises under the control of a parent

– Accounting for investments in subsidiaries in the

separate financial statements of a parent

– Follow other AS in CFS, as applicable

 Applicability

Effective in respect of accounting periods

commencing on or after April 01, 2001

Applicable to enterprises that present consolidated

financial statements
– Mandatory for listed entities
– Optional for other entities
Not Applicable to……..

Methods of accounting for amalgamations and their

effects on consolidation, including goodwill arising on
amalgamation – AS 14

Accounting for investments in associates - AS 23

Accounting for investments in joint ventures – AS 27

Key Definitions…

Subsidiary

– Enterprise controlled by another enterprise

Control

– The ownership, directly or indirectly through subsidiary(ies), of

more than one-half of the voting power of an enterprise
– Control of the composition of the board (in case of company)
or the corresponding governing body (other enterprises) so as
to obtain economic benefits from its activities
(Control is established where there is power to appoint all or
majority of directors/members without the consent or
concurrence of any other person)
 ...Key Definitions

Minority interest
–is that part of the net results of operations and
of the net assets of a subsidiary attributable to
interests which are not owned, directly or
indirectly through subsidiary(ies), by the parent.

Equity
– Residual interest in the assets of an enterprise after deducting
all its liabilities i.e. net worth
What includes in CFS?

Balance Sheet
Use Same format;

Profit and Loss A/c. e.g. Schedule VI

Notes, other statements and explanatory

material that form an integral part thereof

CFS in addition to Individual

cash flow statement FS of the Parent
Scope

Consolidate results of all subsidiaries (domestic /

Foreign)

Subsidiary – Corporate or Non-Corporate – Control

prerequisite

Exceptions:
– Gratuity Trust, Provident Fund Trust – Not held for economic
benefits definition of Control (supra)
Section 25 Company or a Charitable Trust?
Scope

Subsidiary to be excluded from consolidation when:

– Control is intended to be temporary –

– It operates under severe long-term restrictions

which significantly impair its ability to transfer
funds to the parent

AS 13 to be applied and CFS to disclose reasons for

exclusion

Exclusion when activities are dissimilar?
Consolidation procedures…

Line by line consolidation

–Effect to AS - 22

Elimination of parent’s investments and parent’s portion of

equity

Determining goodwill (cost of investments > parent’s portion

of equity); or
capital reserve (cost of investments < parent’s portion of
equity) arising on date of investment
Consolidation procedures…

Determine minority interest
– Profits
– Net Assets

Minority interests in the net assets consist of:

the amount of equity attributable to minorities at the date
on which investment in a subsidiary is made; and

the minorities’ share of movements in equity since the date

the parent-subsidiary relationship came in existence.

Separate Disclosure?
 ...Minority interests

Where losses applicable to a minority exceed minority interest, the

excess to be adjusted against the majority interest, unless the
minority has a binding obligation to, and is able to make good the
losses
Consolidation procedures…

Elimination of intra group transactions including

sales, expenses, dividends, and unrealized profits on
sale of stocks assets.

Eliminate unrealized losses unless cost cannot be

recovered.
(Unrealized profits and loss on transactions relating
to periods prior to April 2001 may not be
eliminated if not practicable to determine)
…Consolidation procedures

Same reporting date for financial statements used in

consolidation; or

If date of reporting differ, FS of the subsidiary for the immediately

preceding period are used (difference between reporting dates
should not be more than six months)

Apply uniform accounting policies and if different, disclose items

where different policy applied

No comparative figures for the previous period for the first year
Disposal of stake in subsidiary

Results to be included in the consolidated profit and

loss account upto the date parent subsidiary
relationship ceases to exist

Difference between proceeds from investments

disposal and equity on the date of disposal
recognised in the consolidated profit and loss
account
Disclosures…

List of all subsidiaries including name, country of incorporation,

proportion of ownership interest and, if different, the proportion
of voting power

The nature of relationship between parent and subsidiary, if

parent does not own one-half of the voting power

The effect of the acquisition and disposal of subsidiaries on the

financial position at the reporting date, the results for the
reporting period and on the corresponding amounts for the
preceding period

The names of the subsidiaries of which the reporting dates are
different from that of the parent and the difference in reporting
dates
 Issues

Presentation of consolidated financial statements of a group

which has diverse businesses such as banking, Insurance,
Mutual Fund, Stock Broking etc.

Identification of goodwill/capital reserve at the time of acquisition

of another enterprise does not capture fair value of assets and
liabilities since the same is based on book value.

Companies Act, 1956 needs to be amended to include

preparation/audit of consolidated financial statements

Should goodwill be subject to amortization/tested for impairment

On first time consolidation can impact of differences in accounting

policies be adjusted against reserves
ASI 8

‘Near future’

Primarily depends on the facts and circumstances of

each case

Ordinarily, not more than twelve months

Intention of disposal of relevant investment should

be considered at the time of acquisition of the
investment
ASI 15

All the notes of separate FS of parent and

subsidiaries need not be included in the
notes to CFS.

Notes necessary for presenting a true and
fair view of CFS

notes involving items which are material

Additional statutory information if material
ASI 24

Control

Enterprise is controlled by two enterprises

– Investment
– Composition of Board

Consolidation to be done by both

ASI 25

Where an enterprise owns majority of voting power

by virtue of ownership of the shares held as ‘stock-
in-trade’

acquired and held exclusively with a view to their

subsequent disposal in the near future,

the control should be considered to be temporary